DRI’s COVID-19 Policy Brief Series

ECONOMIC
IMPACT OF
GOVERNMENT’S
RELIEF PACKAGE

DECEMBER 2020

This publication is a part of Democracy Reporting International’s COVID-19 Policy Brief Series aimed to improve
and strengthen parliamentary oversight of the government’s COVID-19 response by providing technical input to
parliamentarians on key policy areas.
 SUMMARY

The economic effects of the COVID-19 pandemic require
quick and significant actions to keep markets and economy
functioning. The country’s GDP growth has reduced to
(-)0.4 percent in 2020 and is projected at 1.9 percent in
2021 instead of 4.3 percent anticipated in the pre-COVID
scenario. An ambitious relief and fiscal stimulus package
of PKR 1.2 trillion was introduced in March 2020 to revive
the dwindling economy by providing liquidity to firms, cash
transfers to households, and subsidies for firms’ payroll
expenditures. However, foreign and external loans have
continued to surge to unprecedented levels. A sustained
and robust economic policy response is, therefore, critical
to effectively navigate a second wave and set the stage
for a post-pandemic recovery. This policy brief assesses
the performance of government’s fiscal stimulus package
as a crisis response to provide the economy and citizens
immediate breathing space. Based on the analysis given
in this brief, the following policy recommendations are
offered to address structural issues in revenue generation
and expenditure allocations in the context of the pandemic
and higher debt obligations.

KEY ACTIONS RECOMMENDED

Provision of Financial Liquidity to Large, Small and Medium Enterprises

Businesses including SMEs as well as large enterprises are expected to encounter cash flow challenges as
stricter lockdowns are reinstituted. Additional measures such as bailouts, provision of cheap funding solutions
and low discount rates could be considered to prevent widespread insolvency and increase access to financial
liquidity.

Implementation of FATF Reforms to Curb Illegal Remittance Transfers

The government should ensure sustained implementation of reforms proposed by FATF committee. A significant
surge in foreign remittances can be ensured by blocking of illegal channels available for money transfers. This
will support a positive current account balance, and maintain a conducive environment for remittances–providing
greater financial autonomy as well reduce the burden of debt-financing.

Development of Mechanisms for Financial Tracking of Stimulus Package

The government should ensure timely, transparent access to data on the status of the 1.2 trillion PKR stimulus
package in various sectors. This requires improvements in financial tracking mechanisms and coordination.
Without this data, parliament and other key stakeholders such as the media and civil society cannot fully perform
oversight and accountability functions.

Removal of Supply Chain Disruptions of Perishable Items

The rising prices of perishable items have a disproportionate impact on the poor, and reduce economic growth.
Immediate steps should be taken to remove supply chain disruptions of perishable items since they have a direct
correlation with rising inflation rates.

Creating Fiscal Space for COVID-19 Related Expenditures

The government should focus on revenue generation to avoid unnecessary debt and economic instability.
Capacity enhancement in the production sector in particular can play a pivotal role in revenue mobilization.

Identification of Export Opportunities in the Region

Global demand continues a downward trend which is likely to lead to a reduction in exports. The government
should work closely with the private sector to assess entry points and new regional opportunities for exports in
order to diversify from a reliance on traditional export partners.

Development of IT Infrastructure and E-Governance Models

The federal and provincial governments should prioritize IT infrastructure and e-governance models for a
range of benefits such as fuel cost savings, better utilization of resources, increased productivity and a positive
environmental impact. This can also improve governance through enhanced system checks, accountability,
justice and efficiency.

This policy brief is written by Dr. Nadia Farooq (Ph.D Economics) who is an Independent Economist based in Islamabad. She works with
multilateral organizations, local and international think tanks and the public sector on different areas of the economy.
2
INTRODUCTION

As Pakistan finds itself in the grips of a second wave, there
is a dire need to take strong policy measures in priority
areas including external finance and remittances; jobs and
inclusive growth; resilience for recovery and sustainability;
liquidity and financial stability; debt vulnerability; business
engagements and reasonable financial flows. A coherent and
strategic response taking each of these areas into account
is required to safeguard the economy and reduce the fallout
of the pandemic on businesses, workers and households.
The fiscal deficit of the country has demonstrated an
upward trend from fiscal years 2020 till 2022 with some
projected values mentioned in the graph below. According
to the Ministry of Finance, the fiscal deficit has widened
to 8.2 percent of GDP in this fiscal year compared to the
pre-COVID target of 7.1 percent. The tax revenue target
has also been revised substantially downward from PKR
5.5 trillion to PKR 3.9 trillion.

Box #01 – Technical Terms/Glossary

Fiscal deficit is the difference between total revenues (government’s earnings through tax and non-tax resources)
and total expenditures (development and non-development spending). Fiscal deficit means that the government
is spending more while earning less and it is a clear indication of how much total borrowing is required by
government for meeting the expenses.
Non-tax revenue is money earned by government through areas such as bond issuance, profit from state-owned
enterprises and user fee from various public services.
Development expenditure is expenditure on areas such as roads, construction, hospitals, schools and infrastructure.
Non-development expenditure or current expenditure is expenditure on areas such as salaries, pensions and
interest payments.

Data source: Ministry of Finance and State Bank of Pakistan

3
 1
HOW MUCH HAS PAKISTAN ALLOCATED AND SPENT ON
COVID-19 RELATED STIMULUS FOR EACH SECTOR?
WHAT ARE THE SOURCES OF FINANCING?

The Government of Pakistan announced the fiscal stimulus
package of PKR1.2 trillion in March 2020. There is limited
data available on the status of various components of
the package, which constrains the ability of parliament
and other entities such as the media and civil society
to conduct effective oversight and assess the impact of
these initiatives. The following table provides a snapshot
of the main heads under this stimulus package including
allocations and estimated spending1.

STATUS OF THE GOVERNMENT’S 1.2 TRILLION COVID-19 STIMULUS PACKAGE - A SNAPSHOT

S. N0 Main Heads Allocations(PKR) Status

1 Relief to daily wage workers 200 billion 17 bn disbursed

2 Cash transfers under Ehsaas Program 150 billion 145 bn disbursed

3 Tax refunds to exporters 100 billion fully disbursed

Financial support to agriculture sector and

4 100 billion 61 bn disbursed
SMEs

5 Procurement of wheat 280 billion completed

6 Financial support to utility stores 50 billion 10 bn disbursed

Relief in fuel prices

7 [Rs.15/ liter decline in prices of petrol and 70 billion completed
diesel]

8 Support for health and food supplies 15 billion completed

23 bn disbursed,
9 Relief in electricity bills 100 billion
33 bn in process

10 Emergency energy provision 100 billion 41 bn disbursed

1
Estimates are based on limited available public resources as well as unofficial data gathered through expert consultations with public sector officials. While
the accuracy of this data has limitations, it is provided in order to illustrate a macro-level estimate so that parliamentarians have increased space to obtain
comprehensive, official figures and conduct effective oversight.
4
 Funds for National Disaster Management
11 25 billion fully disbursed
Authority for COVID related equipment.

Total 1.2 trillion

Elimination of import duty on emergent health completed 10th June

12
equipment 2020

The fiscal stimulus package was not allocated for any
specific fiscal year – instead, it was developed especially
for the government’s pandemic response and arranged
through supplementary budget sources.
The total amount of PKR 1.2 trillion can be divided as follows:
• PKR 365 billion in non-cash initiatives = {Procurement
of wheat (280 billion) + Relief in fuel prices (70 billion)
+ support for the health and food supply (15 billion)}
completed on 10th June 2020.
• PKR 875 billion in allocated cash expenditures, i.e. areas
with an impact on the fiscal balance, from which PKR
330 billion has been utilized or is in process
An estimated PKR 545 billion thus remains for further
disbursement – a massive amount which can be leveraged
to offset the economic impact of the pandemic’s second
wave in Pakistan, if spent efficiently and transparently.
Further analysis on spending to date in each of the areas
outlined in the table is also required to assess impact,
identify gaps, and make improvements going forward. Some
useful assessments have been conducted – for instance,
the spending in the construction sector has been analysed in
detail by the media. However, no comprehensive assessment
is available that evaluates the impact of stimulus package
on each sector.
Other than the fiscal stimulus the Government of Pakistan
has implemented a number of other policies as a supporting
hand for the economy and which include the following
monetary and financial measures:

Social Protection as Part of the Government’s Stimulus Package

Social protection systems are aimed at protecting the most vulnerable sectors of society, and ultimately strive
to bring citizens out of poverty and reduce inequality. According to Ministry of Planning, Development and
Special Initiatives, an estimated 56.6 percent of the population is socio-economically vulnerable due to the
COVID-19 crisis2. Women and children, especially those from more disadvantaged households and those who
are home-based workers, will be amongst the most impacted. The government has taken some significant
steps to mitigate these impacts. According to the Economic Survey of Pakistan 2019-20, the relief package
introduced PKR 150bn for immediate cash relief in the form of PKR 12,000 per household for four months to
almost 12 million poor families in addition to the already existing 5 million families under Ehsaas Program. This
means that the GoP has extended support to 78 million people, or 32 percent of the population – the program
is likely to be the largest cash transfer initiative in South Asia in terms of its coverage. Additional smaller cash
assistance programs are also intact but these are all integrated with the National Database Registration Authority
(NADRA) identification system including IT based data set-up.

2
https://www.pc.gov.pk/web/poverty

5
 Monetary and Financial Measures3
• Policy rate captures the interest rate on which the
commercial banks obtain money from the central bank.
Those banks then offer financial products, primarily in
the form of loans, to their clients which include entities
in the private and public sector as well as individuals.
The State Bank of Pakistan (SBP) cut the policy rate by
a cumulative 625 bps to 7percent from 13 percent since
March 2020, in order to ease out the lending process.
• SBP expanded the scope of existing refinancing facilities
and introduced some new areas of targeted support
including:
Supporting hospitals and medical centers for
purchase of equipment to detect, contain and
treat COVID-19 (40 hospitals, PKR7.8 billion)
Stimulating investment in new manufacturing
plants and machinery (170 new projects,
PKR125 billion)
Incentivizing businesses to prevent worker
lay-offs during the pandemic (2858 firms,
PKR238 billion)
All these facilities have been extended beyond their
original deadline of June 2020 to December 2020.
• SBP also introduced regulatory measures including:
»» Reduction in capital conservation buffer by 100
basis points to 1.5 percent.
»» Increase in limit on extension of credit to SMEs
from 44 percent to PKR180 million.
»» Relaxation of debt burden ratio for consumer loans
from 50 percent to 60 percent.
»» Allowing banks to defer clients’ payment of principal
by a year
»» Introduction of mandatory targets for banks to
ensure loans to construction activities account for
at least 5 percent of the private sector portfolio by
December 2021.
• The most recent wave of SBP measures include:
»» Enhanced loan limits and expansion of relief
measures for microfinance borrowers
»» Enhanced loan size under the refinance scheme
to support women entrepreneurs
Data source: Reports from State Bank of Pakistan and IMF
3
www.sbp.org.pk
It is important to note that these amounts, mentioned in this table are specifically for the COVID assistance.
4
6
»» Increased limit of Rs. 190 billion for exporters
»» Extended time for settlement of foreign currency
loans
Budget Allocations 2020-21
In addition to the fiscal stimulus analysed in the previous
section, the budget also includes increase in allocations for
other sectors. These include: health and social spending,
tariff and custom duty reductions on food items, allocation
for ‘COVID-19 Responsive and Natural Calamities Control
Program’ (PKR 70 billion), a housing package to subsidize
mortgages (PKR 30 billion), as well as provision of tax
incentives to the construction sector (retail and cement
companies).
The provincial governments have announced tax relaxations
and a sizeable increase in expenditure, especially for the
direct health response for the pandemic.
Provincial Allocations
Provincial governments have also been implementing
supportive fiscal measures through June 2020, consisting
of cash grants to low-income households, tax relief, and
additional health spending including a salary increase for
healthcare workers.
• Measures by government of Punjab include a tax relief
package of PKR 18 billion and a cash grant program
worth PKR 10 billion.
• Measures by government of Sindh include a cash grant
and ration distribution program worth PKR 1.5 billion
for low-income households.
Foreign Support
International agencies and donors have supported the
Government of Pakistan4 with US$ 3.8 billions in loans and
grants to address health and socio-economic challenges.
Details are provided in the table below where US$ 2,636
billion are allocated for the budgetary support (that is
solely for the support of budget related expenses). The
total amount of US$ 2.386 billion have been used in budget
FY2019-20 while US$ 250 million from Asian Infrastructure
investment Bank (AIIB) and US$ 200 million from Asian
Development Bank (ADB) for project financing have been
allocated for the budget period FY2020-21. The US$ 1.031
billion for project financing are loan-based financing and
US$ 170.65 million are interest-free amounts:
TABLE # 02

Country/Organization Committed (US$ M) Disbursed (US$ M) Beneficiary

A. Budgetary Support (Loans)

IMF 1,386 5 1,386 Finance Division

Asian Development Bank 500 500 Finance Division

Asian Infrastructure Investment

750 750 Finance Division
Bank

Sub Total – I 2,636 2,636

B. Project Financing (Loans)

M/o NHSR&C, NDMA,

World Bank (WB) 510 114.2
BISP, Provincial Govts.

Asian Development Bank 350 248 NDMA, BISP, NDRMF

Islamic Development Bank 70 0 M/o NHSR&C

OPEC Fund for International

50 0 M/oNHSR&C
Development

French Development Agency 47 0 NDMRF, MOCC

Sub Total - II 1,031.07 383.62

C. Grants-in-Aid

European Union 57.34 39.50 INGOs/NGOs

INGO, HIS, CDC,

United States of America 41.90 20.87
UNHCR
MoNHSR&C, NDMA,
Japan 32.33 6.87 UNICEF, IOM, UNHRC,
IFRC, UNOPS

World Bank 19.86 - MoFEPT

Asian Development Bank 7.78 0.50 MoNHSR&C, NDRMF

China 4 4 NDMA

United Kingdom 3.22 2.31 WHO

WFP, UNHCR, OCHA,

Canada 2.39 2.39
ICRC

South Korea 0.85 0.85 WHO

IsBD 0.42 0.21 GoS, GoKP

United Nations 0.4 0.4 WHO

Sub Total - III 170.65 79.99

GRAND TOTAL (A+B+C) 3,837.82 3,097.61

5
This amount is additional to the IMF’s Extended Fund Facility Program, without any conditions.

7
 G-20 countries provided a relief of US$2.012 billion through
debt service suspension and create fiscal space to protect
the lives and livelihood of citizens and mitigate the socio-
economic impact of COVID-19. It also helped the GoP to
improve foreign exchange reserves, stabilize exchange
rate and build buffers. Based on current economic, fiscal,
monetary and exchange rate policies and prospects for the
global economy, economic activity is expected to recover
in the current fiscal year. However, GDP growth remains
challenging.

2
DYNAMICS OF FISCAL STIMULUS.
CAN IT CAUSE AN INCREASE IN THE NATIONAL DEBT OR ARE
THERE OTHER LOOMING RISKS INTACT WITH IT?

Pakistan’s economy is facing many challenges catalysed business travel, and supply disruptions. Total public debt has
by COVID-19 including reduced revenues and increased expanded from PKR29.521 bn to PKR33.251bn in FY2020.
expenditures, slashed domestic and global demand, reduced External debt has increased by 9 percent while domestic
trade and production linkages, a decline in tourism and debt has increased to 11 percent from FY2019 to FY2020.

Data source: State Bank of Pakistan

The debt to GDP ratio has increased significantly, mainly Responsibility and Debt Limitation Act 2005 (FRDL) the
because of the extreme decline in growth and increase in debt to GDP ratio should not exceed 60 percent of GDP
budget deficit caused primarily by increased expenditures – Pakistan is currently well ahead of this with the ratio
related to the COVID-19 outbreak. According to the Fiscal exceeding 80 percent.

Box #3
The Fiscal Responsibility and Debt Limitation Act 2005, which was revised in 2016, proposes a reduction of
public debt to 60 percent of GDP however, the public debt levels continue to breach this threshold. Chapter II and
Section 3(b) of FRDL states: “ensuring that within a period of two financial years, beginning from the financial
year 2016-17, the total public debt shall be reduced to sixty percent of the estimated gross domestic product”.
This Act was implemented to improve the overall fiscal discipline in the country to achieve the desired level of
economic growth. The bench mark amount of 60 percent is a calculated assumption for reaching the desired
level of economic growth. The law emphasises revenue deficits as a primary source of concern for fiscal
policymakers. According to Fiscal Policy statement, “revenue balance is the total revenues minus current
expenditures. The persistence of revenue deficit indicates that the government is not only borrowing to finance
its development expenditure, but partially to finance its current expenditure or non-development expenditure”.

8
Data source: Ministry of Finance and State Bank of Pakistan
COVID-19’s economic impacts merit the alleviation of debt
obligations for countries like Pakistan. The government had
been vocal on this issue at various international forums
during early months of the pandemic. The temporary debt
standstill provided by the G20’s Debt Service Suspension
Initiative (DSSI) is a laudable step, but it is not sufficient.
Coverage, duration and depth of debt relief needs to be
expanded and extended beyond the current DSSI.
It is safe to assume that the longer the pandemic lasts, the
higher will be its costs and future debt burdens. According
to a World Bank report, Pakistan has performed well as
compared to regional neighbours. However, its expansionary
fiscal policy (high expenditures) to create relief for citizens
and businesses against the impact of Covid-19 as an
immediate priority need to be balanced in the medium to
long term against unsustainable debt accumulation.
Looming Risks
As the second wave of coronavirus gathers steam, further
economic setbacks may occur. The government has already
taken steps for mitigating demand compression but key
risks remain which should inform policy discourse:
3
HOW CAN THE GOVERNMENT ENSURE THAT RECOVERY
POLICIES STEER ECONOMY TOWARDS AN INCLUSIVE,
SUSTAINABLE AND RESILIENT DEVELOPMENT PATHWAY?
• The economic circumstances of the COVID-19 pandemic
require quick and significant actions to keep markets
and economy functioning. Fiscal space has shrunk
after massive spending on social safety nets in these
pandemic days. The following highlights provide a fiscal
snapshot for the current year:
MoFinance, Sep 2020
6
• Pakistan has rolled out a laudable socio-economic
package for citizens affected by COVID-19. However, a
continued rise in cases through the winter months may
make it difficult to fulfill financing needs indigenously
for such expenditures.
• Uncertain world conditions can contract the demand
and volume of exports in the country. Global trade will
further dampen and there is thus a high likelihood of
constricting exports and remittances inflows.
• The year-on-year inflation increased to 9 percent6 in
Sep2020 and the IMF has projected further increase.
Initially this was due to supply chain disruptions for
perishable items, which have a disproportionate impact
on the poor and reduce economic growth.
• Rising cases can amplify risks in financial markets
which can further reduce equity prices.
• Domestic fiscal adjustment may become even more
challenging with ever-increasing recurrent expenditures
and a downward trend for development expenditures.
»» Total expenditures have increased to 17 percent
during 2020 as compared to 11.3 percent in 2019.
This is mainly because of COVID-19 related current
expenditures which have surged in the last quarter
of 2020 at levels comparable to 1998.
9
 »» Development expenditures have declined by
2 percent in 2020 and PSDP (Public Sector
Development Program) spending has also been
shrinking. The fiscal deficit has increased while there
is a 6.3 percent decline in revenue as compared
to 2019.
»» The government has revised the tax collection
target from PKR5,503 billion to PKR3,907 billion in
the current fiscal year.
»» The provinces remained intact in terms of fiscal
consolidation (policies to reduce deficits through
lower expenditures and debt accumulation) and
showed a surplus at 53 percent of the target. The
provincial share in federal revenue grew by 4.4
percent during FY2020 as compared to 8.1 percent
in the last year.
»» Total provincial expenditures grew by 10.7 percent
during FY2020 with growth in both development
and current expenditures.
»» Sindh and Balochistan invested more in education
while Punjab and KP transferred funds to district
authorities in order to provide services to the general
public.
• This gives us a clear picture that pressure emerged
simultaneously on terms of both expenditure and
revenue, as a fiscal stimulus package necessitated
cash transfer to the vulnerable population and to give
access to health care facilities just as revenue shrank
significantly during the lockdown.
• It also depicts a clear direction of travel for the
government in terms of the need to take some solid
measures for increasing local revenues for resilient
and inclusive growth. Policies are required to jumpstart
revenue mobilization through the production sector
and support employment generation that caters to a
60 percent youth bulge in the country. For example,
textile orders currently exceed the existing scale of
production – there is a clear need to enhance the
capacity of the industrial sector and strengthen value
chains. Petroleum prices are also down and fiscal space
can be created through a prudent expenditure policy.
Commitment to these types of longer term reforms
are essential once the economy is out of the grips of
the immediate ramifications of COVID-19 pandemic.
»» The domestic debt comprised 64 percent while
foreign debt comprised 36 percent of the total debt
in 2020. In other words, two-thirds of the rise in
debt in fiscal year 2020 is from domestic sources.
Domestic debt is primarily obtained from local
commercial banks for financing the fiscal deficit
and lending support to the PSDP.
»» External loans are obtained from foreign sources to
diversify borrowing, build foreign exchange reserves,
finance large development expenditures etc. The
share of government’s external debt decreased
while debt from the IMF increased by PKR 0.4
trillion7. The increased loan from IMF not only
includes the tranches received under the Extended
Fund Facility (EFF), but also the inflows under the
Rapid Financing Instrument (RFI) after the onset of
the COVID-19 pandemic. To ensure external debt
sustainability, the government needs to increase
revenues for minimizing pressures on the fiscal
front and to increase exports and remittances
for smooth repayments of external debt without
increasing the additional debt.

Government intervention has magnified importance in countries like Pakistan where 24 percent of the total
population is below the poverty line and a big chunk of the population requires social and financial support. In
the short to medium term, the government may have to prioritize resilience over efficiency so that the economy
can withstand certain types of crises, address supply chain challenges, promote social cohesion and reduce
environmental degradation.

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Reference: Quarterly Report of State Bank of Pakistan

This material has been funded by UK aid from the UK government; however, the views expressed do not
necessarily reflect the UK government’s official policies.